Strategic Human Capital

by

Rhett Brymer, Janice Molloy, Clint Chadwick

• LAST REVIEWED: 31 August 2015
• LAST MODIFIED: 31 August 2015
• DOI: 10.1093/obo/9780199846740-0082

Introduction

Strategic human capital (SHC) scholarship explains relationships between human capital and individual outcomes relevant to firms’ value capture (such as mobility and income) or firm performance. Human capital is typically defined as embodied knowledge, skills, abilities, and other attributes of employees that can be put to productive use. Management scholars have increasingly been examining how firms can gain and sustain competitive advantage through human capital. Of particular interest are the unique managerial dilemmas that human capital presents to firms, such as how to deploy employees’ human capital in ways that create value and how to divide any value created by human capital between employees possessing the human capital and other stakeholders, such as their employing firms. Given the complexity of these dilemmas and their centrality to management scholarship, scholars examine human capital within many areas in management literature, including human resource management (HRM), organizational behavior (OB), and strategic management.

The focus of this entry, strategic human capital (SHC), refers to scholarship that relates aspects of HRM, OB, and strategic management theory and research to human capital phenomena as a way of explaining cross-firm variance in performance, both by analysis of the firms themselves and the individuals nested within them. SHC scholarship originated in the staffing, compensation, and strategic human resource management (SHRM) literature within HRM; the motivation, trust, and group performance literature within OB; and the strategic factor market- and resource-based theory literature within strategic management. Hence SHC scholarship is complementary to, yet distinct from literature in HRM, OB, and strategic management. From an SHC perspective, the three other types of research differ in their assumptions regarding labor markets. SHC scholars’ research gives theoretical primacy to labor markets because these scholars believe markets have important implications for individual and firm outcomes. In contrast, HRM-OB scholarship typically controls for labor market conditions, as these scholars emphasize the primacy of intraorganizational factors (such as HRM systems and practices) and intraindividual factors (such as personality traits and abilities). Strategic management and SHC scholarship share the assumption that features of strategic factor markets (such as labor markets) have important implications for firm performance. Strategic management scholarship differs from SHC scholarship in that the former does not emphasize characteristics that differentiate labor markets from other factor markets (e.g., workers have perpetual property rights over their human capital, and workers are inalienable) or the implications of these differences.

Which aspects of labor markets do SHC researchers consider important? SHC scholars have strong interest in market imperfections (or frictions), which are ways that markets differ from perfect competition discussed in economic theory and textbooks. Many types of imperfections exist. Some examples include that supply and demand for human capital rarely comes to equilibrium, that firms hire workers using criteria other than what will increase the firm’s wealth, and that individuals consider nonpecuniary factors such as geographic location when making employment decisions. SHC scholars are also interested in differentiating labor markets with different structures, such as mediated versus nonmediated markets. The emphasis on labor markets can be seen in the topics of many SHC manuscripts, such as human capital pipelines (e.g., connections between a hiring firm and a source organization such as a university); lateral hiring (e.g., firms poaching competitors’ employees); and the implications of workers’ mobility across firms (and workers’ potential to found entrepreneurial firms that compete with their former employers). Finally SHC scholars examine interactions between types of labor markets and types of human capital. Here the focus is how the intensity of competition in a labor market influences the potential for an employer to create and capture value from, for example, general human capital.

Emergence of SHC Scholarship

Of course, because strict boundaries do not exist between research areas, some SHC scholars examine some phenomena of interest to HRM scholars, such as HRM practices, or to OB and strategic management scholars, such as trust within senior executive teams. To illustrate how these types of research differ, consider how turnover is examined in the HRM, OB, SHRM, and SHC research.

Micro-HRM and OB scholars primarily examine turnover by identifying how individual workers’ characteristics affect the likelihood that they will leave an organization, both directly and in interaction with situational factors. In strategic HRM (SHRM) research, the emphasis is on how a firm’s system of HR practices affects firm-level aggregate turnover and, in turn, firm level performance. In contrast, SHC scholars typically address employee turnover in terms of employee mobility from firm to firm within the labor market. Here the focus is the tracking of employee movement between firms and the firm performance implications of turnover for the firms that workers leave and the firms that workers join or create. In other words, SHC scholars frame the phenomena that OB, micro-HRM, and SHRM scholars examine within labor market contexts, and the subsequent SHC treatment of these phenomena are informed by consideration of those contexts.

In summary, HRM, OB, strategic management, and SHC scholars each address pressing scholarly and managerial concerns involving people. These types of research are related and potentially complementary, yet also distinct given that each literature uses a unique lens to examine employees and organizations. With the exception of HRM practices, SHC topics of interest are generally not addressed within the SHRM, HRM, OB, or strategic management literature. Omission of these topics from these types of research and from associated textbooks was one factor that has prompted the creation of a formalized community of SHC scholars.

While the SHC field has only recently been formalized, a number of foundational works from economics, HRM, OB, and strategy set the stage for SHC research’s emergence. Becker 2009 remains a monumental intellectual work in SHC, providing a foundation for the economics of human capital and its implications for individuals and firms. In the late 1980s and early 1990s, two major parallel advancements created the theoretical lens and served as the major foundations of strategic human capital scholarship. First, the area of strategic human resource management (SHRM) began examining the firm-level impacts of HRM practices, the most influential work being Huselid 1995. This new research stream differed from traditional HRM research in linking systems of HR practices with firm performance (Wright and McMahan 1992; Wright, et al. 2001).

Second, the resource-based view (Barney 1991) materialized as a major theoretical perspective in management. It is now the dominant theoretical paradigm of understanding firms’ competitive advantage and the major theoretical basis for understanding the importance of human capital resources (Barney and Wright 1998). Although much progress was made in these decades, Ployhart 2004 outlines the extraordinary scope of questions still unanswered by traditional HR and strategy research—specifically, how employee behavior and human capital aggregated in ways that would affect firm performance. Significant advancement has occurred very recently in SHC scholarship. Molloy, et al. 2009 led to a formalized interest group within the Strategic Management Society, helping to create legitimacy and a critical mass of scholars who identify with the area. Recently there have been outlets that have featured SHC research, including the Oxford Handbook of Human Capital in 2012 and special issues on strategic human capital by Journal of Management in 2014 and Academy of Management Perspectives, due to be published in 2016.

• Barney, J. B. “Firm Resources and Sustained Competitive Advantage.” Journal of Management 17.1 (1991): 99–120.

  DOI: 10.1177/014920639101700108

  The seminal 1991 article names human capital as one of three fundamental firm resources and argues that social complexity (a loose aggregate of the firm-level human capital resources) makes it particularly difficult for competitors to imitate.

• Barney, J. B., and P. M. Wright. “On Becoming a Strategic Partner: The Role of Human Resources in Gaining Competitive Advantage.” Human Resource Management 37.1 (1998): 31–46.

  DOI: 10.1002/(SICI)1099-050X(199821)37:1<31::AID-HRM4>3.0.CO;2-W

  Extends resource-based logic specific to human capital resources, and suggests alignment of human capital and HR strategies with the organization’s strategy can be associated with gains of competitive advantage. In addition, the article argues plainly that gains of competitive advantage through human capital are common and feasible.

• Becker, G. S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago: University of Chicago Press, 2009.

  Originally published in 1964, this classic work of human capital literature explores, among many other things, investments made by firms into employees’ FSHC and GHC. Investments into FSHC are theorized to have greater returns to the firm over time, as firms are able to more easily appropriate value from employees with high FSHC.

• Huselid, M. A. “The Impact of Human Resource Management Practices on Turnover, Productivity, and Corporate Financial Performance.” Academy of Management Journal 38.3 (1995): 635–672.

  DOI: 10.2307/256741

  In the most highly cited AMJ article of all time, Huselid examined the extent that firms engaged in high-performance human resource practices. He demonstrated that those practices drove crucial firm-level outcomes, such as turnover, productivity, and firm performance.

• Molloy, J., R. Coff, D. Lepak, P. Wright, J. Delery, and T. Zenger. Formation of a Multidisciplinary Interest Group on Human Capital and Firm Performance. Proposal to Strategic Management Society, Board of Directors. Chicago: Strategic Management Society Archives, Strategic Management Society Executive Office, 2009.

  This white paper was the catalyst for this discussion, as it outlines the SHC conceptual domain, and the need for and purposes of the interest group.

• Ployhart, R. E. “Organizational Staffing: A Multilevel Review, Synthesis, and Model.” In Research In Personnel and Human Resources Management. Vol. 23. Edited J. J. Martocchio, 121–176. Oxford: Elsevier, 2004.

  Argues that staffing theory and research requires extensions to more fully understand relationships between human capital and firm performance. Explains that some relationships that are likely taken for granted, such as between aggregate individual and firm performance, had not actually been empirically tested. Outlines an agenda for future SHC scholarship.

• Wright, P. M., B. B. Dunford, and S. A. Snell. “Human Resources and the Resource-Based View of the Firm.” Journal of Management 27.6 (2001): 701–721.

  DOI: 10.1177/014920630102700607

  Noted that, overwhelmingly, the resource-based view of the firm was the theoretical perspective of human resource (HRM and SHRM) researchers that sought to frame their findings in firm-level outcomes.

• Wright, P. M., and G. C. McMahan. “Theoretical Perspectives for Strategic Human Resource Management.” Journal of Management 18.2 (1992): 295–320.

  DOI: 10.1177/014920639201800205

  Laid the foundation for exploring HRM through the theoretical lenses typical of strategic management.